Baillie Gifford UK Growth wants to start investing in unlisted companies

The investment trust is seeking shareholder approval to be able to invest in private companies.

Baillie Gifford UK Growth (LSE:BGUK) is hoping to be able to invest up to 10% of its portfolio in companies not listed on a stock exchange.

In its latest Annual Financial Report, the investment trust said that it will seek shareholder approval at its next Annual General Meeting (AGM) to change its mandate to allow it to invest 10% in unlisted companies. The meeting will take place on 5 August 2021.

The trust notes: “we are keen for shareholders to give us permission to have the ability to invest in private companies, subject to prudent limits. We see the private company space as potentially an interesting area to find exciting growth companies to invest in that we believe can help us in our objective of generating total returns in excess of the FTSE All-Share index.”

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Baillie Gifford points to the well-documented trend of companies now staying private for longer. As a result, many companies have already experienced their most rapid growth before listing on public markets. Allowing the portfolio to include some private companies, the trust hopes, will help ensure it does not miss these opportunities.

Several of Baillie Gifford’s investment trusts, most notably Scottish Mortgage (LSE:SMT), already have mandates to invest part of their portfolio in private companies for this reason. As a result, Baillie Gifford has an internal Private Companies team, which presumably will assist Baillie Gifford UK Growth with any unlisted company investments.

Other fund houses have also followed suit. Fidelity China Special Situations (LSE:FCSS), in its latest financial results, announced that the trust intends to increase the amount it can hold in unlisted companies from 10% to 15%, subject to shareholder approval. With their pool of fixed capital, investment trusts are an ideal way to allow retail investors access to companies still on private markets. But while many global trusts are expanding their ability to invest in unlisted companies, this is rarer among UK-focused trusts.

Partly, this may be due to a perception of a lack of suitable unlisted companies in the UK – a sense perhaps compounded by the failure of Woodford Patient Capital. Indeed, as former Baillie Gifford manager James Anderson pointed out in the wake of the Woodford debacle, Woodford was “trying to do something useful but on a canvas that was limited. It is dubious whether British capitalism produces enough of such [early stage] companies.”

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However, it is important to note that Baillie Gifford UK Growth does not want to invest in small early-stage start-up companies. As the managers argue: “We have no intention to alter the type of business we currently seek to invest in if shareholders approve this proposal i.e. we would not be investing in small, early stage venture capital style businesses.”

The trust stresses that the mandate change is simply to give it the opportunity to invest in private companies should the opportunity arise, with 10% the upper limit rather than a target. As the trust notes: “To be clear, we see this proposal as simply widening the universe and are under no obligation, nor do we have a strong desire, to use these powers unless a compelling individual opportunity presents itself.”

The trust also announced that its name has now changed from Baillie Gifford UK Growth Fund to Baillie Gifford UK Growth trust. They argue: “This has been done to clarify that the company is an investment trust and therefore has a different corporate structure and opportunity set when compared to an open-ended fund. The company's web address has therefore also been amended.”